by Ryan Griggs

Many who are considering implementing, and some who already have implemented, the IBC are concerned about rising price inflation. Is IBC still a good idea given worsening monetary policy in the United States?

The other day a client asked me about my thoughts on the propriety of IBC given the ever-worsening monetary policy in the United States (and the world). I came to this blog to find an essay that I must have written on the subject. While I’ve touched on the question in essays on other topics, it turns out that I hadn’t written something on the question directly. Let’s resolve that.

For those who don’t know, I wanted to be a professor of economics for over ten years. I have a Bachelor’s and Master’s in economics; I’ve interned with and participated in multiple programs at the Mises Institute going back to 2013 (Mises University, passed the oral exam with honors; the Austrian Economics Research Conference; and an internship in summer of that year); I did a year of a PhD program in Agricultural and Applied Economics at Texas Tech; and I’m about to start another with a university abroad with a dissertation on capital theory. Prof. Bob Murphy and I recently submitted an academic journal article on Austrian Business Cycle Theory, an original look the Austrian True Money Supply statistic, and the phenomenon of yield curve inversion, which has been accepted for publication.

I really enjoy the topics of money, banking, and capital theory.

Before addressing how IBC in general and specific dividend-paying whole life insurance policies in particular fit in the context of souring monetary policy, we have to talk about why price inflation is considered a bad thing.

We all know that in our day-to-day lives that we don’t like to pay prices today that are higher than they were yesterday.

However, the problem with price inflation is not rising prices per se. For instance, you could imagine a situation where prices may be rising, but the quantity of your available financial resources is rising faster. Of course, we would prefer that our available financial resources are increasing and that prices are falling — this would be even more favorable. But in the post-1913 era of centralized banking, the idea of generally falling prices may be more of a myth than a possibility.

This is why it’s helpful to talk in terms of an individual’s purchasing power. What we really care about, or what we should care about, is whether the individual’s capacity to impose his will on the spectrum of goods and services available for exchange is rising. All else equal, we’d all prefer that our power to purchase increases relatively — and ideally, regularly.

A more sophisticated, but still lacking, articulation of the problem of price inflation is the idea that the individual’s purchasing power is decreasing if prices are rising and his income is either fixed and unchanging, or growing, but growing slower than the rate at which prices are rising.

This is the idea that inflation punishes those on fixed incomes most. And as far as the statement goes, it’s true, or more exactly, it’s half-true.

Here’s why: income is not the only constituent element of an individual’s available financial resources (which is why I so often use the latter, more comprehensive term).

In general, I think income gets way too much attention in financial media and education. From the economic perspective, the only reason income is important is because it positively contributes to an individual’s capital, where capital is understood as accessible monetary value. For instance, income may increase the magnitude of one line item on the asset side of the ledger: cash balances (or cash-in-the-bank). But there are other assets!

People focus on income so much because no one was ever taught what capital is and that strategizing to deliberately accumulate a growing, accessible quantity of it over one’s lifetime might be a good thing. The closest example of a non-income source of rising purchasing power is residential real estate appreciation. If you’re a homeowner and you pay attention to your local real estate market, or if you’ve ever thought about taking out a line of credit to renovate the house or purchase a business asset, then you’re more cognizant of the changes in the equity in your home.

The problem with the example of equity in the home is that it’s typically outside of an particular individual’s control, unless you’re the type whose determined to make improvements that are likely to raise the resale value of your home.

The point is that there are economic phenomena other than income that affect the individual’s purchasing power. This will become extremely important when we turn our attention to dividend-paying whole life and the IBC.

Unfortunately, for many, though not all, income isn’t exactly under the individual’s direct control either, especially for fixed-pay employees. Plus, let’s be real: if we could earn any more income in our given circumstances, we would be. Like Rothbard said about companies, we’re already maximizing revenue.

The hidden assumption in the idea that price inflation is a bad thing is that the magnitude of the individual’s capital (one constituent, contributing factor to which is income) is either decreasing, fixed, or rising slower than the rate of price inflation. While income certainly matters, it is nested within the broader idea of the individual’s capital. In the view of contemporary financial analysis, we add the additional assumptions that the magnitude of an individual’s income and asset values are out of the individual’s control.

Disaggregating these assumptions is the key to answering the objection that implementing IBC is a bad idea because cash value in whole life is denominated in US dollars, and that expected future price inflation (maybe even hyper-inflation) makes ownership of all US-dollar denominated assets a bad idea.

Another problem to address is the misunderstanding of what money is. I even bristle at the term “US-Dollar denominated” asset. Look, it isn’t like anyone is forcing you to “denominate” or to think of the value of an asset in terms of US Dollars. “Denominate” assets in bananas if you want, for all I care. But the reason assets are denominated, or rather, why the prospective market prices of them are quoted in terms of US Dollars is because the US Dollar is money in this country. Why this happens to be the case is a subject for another time, but in any case is a consequence of historical circumstance. For now, the US Dollar is the general medium of exchange.

Put differently, the US Dollar is the most saleable asset available for exchange. Therefore, of course, assets are denominated in terms of it! And by the way, when you bought your home, you didn’t call up the real estate agent and say, “you know, I’m pretty concerned that this piece of property is denominated in US Dollars.” Or if you have a business, you’ve never thought to complain to your accountant, “you know, it’s probably not a great thing that my business is denominated in US Dollars.” And I’ll bet you a steak dinner that if you have a tax-qualified retirement plan that you didn’t ask your adviser about the propriety of making contributions due to the fact that securities are valued in dollars.

Of course you didn’t, because, and here’s the punch line: what the money is at a given point of time is out of your control. The point is that money solves for the double coincidence of wants. It opens up the scope of potential exchanges beyond the range of available exchanges if you were restricted to exchanging the specific good or service that someone else wants to consume. With money, with a good that you demand solely for it’s exchange value, you no longer have to barter, or to trade goods and services of consumption value alone. I’d go so far to say that in the context of property rights and free contract, there is an inevitability toward the development of money. In other words, there’s going to be a money! And goods and services will be denominated in that money, whatever it happens to be.

What matters in the context of the individual’s financial profile is whether the monetary value (whatever the money is!) of their assets — their capital — is rising. This is one of the many reasons I harp on the idea of capital so much. In a sense, it’s deeper than money. Ludwig von Mises did not say in Human Action that the entrepreneur calculates money. He said that the entrepreneur calculates (he discerns the value of property) capital in terms of money.

This is why I’ve told friends and clients that I don’t really care what the money is. By the way, it’s out of my (and your) control anyway. What I care about is that my capital is increasing. Capital is one half — the half that I have some control over — of the question of purchasing power. And if I can increase my capital faster than the prices of the stuff I want to buy, then my purchasing power is increasing.

What I’ve done to implement this idea is to buy assets, the value of which I know will increase in value, on a guaranteed, non-taxed basis over time, and which afford me the contractual right to borrow against them when I want to acquire money to use for what I want, to repay if and when I want. Can you guess which asset I’m talking about?

Nelson Nash started purchasing whole life insurance from his brother in the 1950s. Here’s a question: do you think he was upset to own this “dollar-denominated asset” in 2005 after 40–50 years of money supply expansion and rising prices?

Of course he wasn’t! Why? Because what mattered to him was that the value of the contract was increasing beyond what he paid into it.

Look at the illustrations in Equipment Financing of Becoming Your Own Banker. Unfortunately there’s no cost basis — or cumulative premium (the total amount of premium paid in since day one) — but you could piece one together. In illustrations 2 through 5, after the first four years of $40,000 in total premium outlay, there is an additional $18,000 in PUA premium paid out of the policy owner’s pocket every four years [pg. 53, first paragraph]. The net cost basis at the end of year 8 is $58,000; at the end of year 12, it’s $76,000; and so on. I say “net” cost basis, because remember that base premium is getting paid from year 5 (year 6 in illustration 6) through year 36, but it’s getting paid either from the dividend alone or from a combination of dividends and partial surrenders [pg. 51, fifth paragraph].

Or, take illustration 1, for instance, where the cost basis is obvious: the logger pays in $40,000 for 4 years for a total cost basis of $160,000. Since the individual pays no further premium out of pocket in year 5 to 36, the cost basis remains $160,000. But look at the cash value (capital) column! In year 10 it’s $229,940; year 20, $462,092; year 30, $967,607; and so on.

The book was published in the year 2000. Assuming the policy started in the year 2000, and given the money supply expansion from 2000 to 2020, do you think Mr. Logger would have been sitting in his living room saying, “you know, there’s been a lot of money supply growth and price inflation over the past 20 years, I’m pretty pissed off that I have this asset with all this accessible cash value that accumulated without triggering tax and regardless of what the stock market was doing because it’s a dollar-denominated asset!”

Of course he wouldn’t.

He wouldn’t be upset because he would have had funded an asset (sub-optimally [!!!]), the value of which grew every year, as the value of whole life insurance does. In other words, this asset value growth increased his overall capital over time.

We think of economic problems in far too global terms. And economists are the most guilty of this. They say “the dollar” is depreciating. “The dollar” is losing its value. Really? Is it? Everywhere and at all times, is it actually the case that a dollar today buys less today than it bought last week?

No.

Because, watch me here, dollars paid into whole life insurance appreciate. Period.

When we say a dollar is appreciating or depreciating, it’s appreciating or depreciating in terms of something else. In terms of gallons of gasoline, my dollar may be depreciating. In terms of square feet of commercial real estate, my dollar may be depreciating. In terms of used cars, my dollar may be depreciating.

But in terms of cash value in life insurance, my dollar is appreciating.

I’m getting more and more cash value per premium dollar every year through my life expectancy.

Nelson Nash used to say that “whole life insurance built this a’way [for IBC] is a natural hedge against inflation.”

So what does the era of money expansion mean for the IBC? The answer is it depends on your view of capital. Do you want more and more capital over time with which to confront the spectacle of rising prices? If so, then your conclusion regarding IBC should be the exact opposite of what most people think (what really is new in the world anyway?).

And by the way, the more premium paid into a dividend-paying whole life insurance contract, the disproportionately more cash value you accumulate. Remember that cash value growth in whole life is compounded. It’s exponential. So double the premium produces more than double the cash value, all else equal.

Nelson Nash called IBC your own personal monetary system. In a sense, I don’t care what’s going on with the money supply. By the way—I still can’t control the rate of money supply growth! As it turns out, I am not a Federal Reserve Bank or commercial bank president. I don’t get to influence the overall rate of increase in new money production.

What I can control is whether I systematically accumulate capital in an asset that I own and control. In fact, as we’ve shown here, in a price inflationary environment, it’s all the more urgent that I trigger a lifetime capital growth cycle in order to combat the elite’s war on my and my family’s purchasing power.

Put differently, in all economic circumstances I prefer to have more capital rather than less.

And thanks to Nelson Nash, we know exactly how to get it.

The next stage of this objection goes something like: but what if the dollar collapses totally?

First, let’s get less global. Suppose that “collapse of the dollar” actually means that the US Dollar is no longer the world reserve currency. That could certainly happen, but is it very likely? Recall that the US empire has military bases in virtually every developed country in the world. Would US financial elite simply accept that all of these countries would just stop using the currency that, through the cartelized fractional reserve banking system led by the Fed, they control? Without a fight? I’m guessing not, but OK, let’s go there.

I doubt that just because dollars are no longer the reserve currency abroad, or even used to transact internationally, that you and I would stop using them to buy houses, groceries, and gasoline. But OK, let’s go there too.

In fact, let’s assume that the dollar just disappears overnight.

What then?

We need to untangle this idea that somehow assets are inherently intertwined with a specific money. Sometimes I get the feeling that people think that, well, if the dollar went away, then the assets that are denominated in dollars would go away too. I think this is just an unexamined assumption that’s manage to wiggle its way into our financial thinking.

Look at it historically. The money in the US has changed many times. In various places and at various times it’s been fiat federal reserve notes, gold, silver, tobacco, grain, and so on. Did the non-money property, say for instance the houses people lived in, disappear each time the money changed?

Of course not.

What happens when the specific physical manifestation of money changes is that the assets available for exchange are now re-quoted (repriced) in terms of that new money.

Sometimes I think that all the fear porn online and on television (and the economists aren’t innocent here) leads people to believe that if the dollar were no longer the money, that somehow we would all be forced back into barter, as though human beings would just forget centuries of economic intellectual development and voluntarily choose to be bound by the severe restrictions of barter.

This type of global, wild, imprecise financial fantasizing must be rejected root and branch. It just isn’t healthy to wallow in economic fatalism, and as I’ve started to argue here, it isn’t even realistic.

No, if the US Dollar were no longer the general medium of exchange in the land between the Pacific and Atlantic oceans, then something else would be. And property (assets) would be denominated (priced, quoted) in that money.

This includes life insurance.

Listen, the growth dynamics between premium, cash values, and death benefits do not depend on the US Dollar. Do you know they have life insurance in Canada? Turns out they don’t use the US Dollar. The same used to go for Great Britain. They had life insurance, and the elements of it were not quoted in US Dollars. Again, there is this unspoken, implicit assumption that somehow, if there is no US Dollar, there could be no life insurance in America. This hidden assumption must be brought to the light, acknowledged, and demolished.

If the money in the US changed to Bitcoin, homes would be priced in Bitcoin. If the money changed to gold, shares to publicly traded companies would priced in weights (pounds and ounces) of gold. If the money changed to Fedcoin, gallons of gas would be denominated in Fedcoin. If the money changed to any one of these or some other currency, premiums, cash values, dividends, and death benefits would be priced in terms of that new money. And existing policies, just like existing shares of stock and homes, would be repriced in terms of that new money.

You might say this sounds like speculation. To which I would say, well, of course it is. We’re talking about the future, here. It’s all speculation. But when given the choice of analyzing possible future states of affairs in terms that align with theoretical, historical, international evidence as opposed to apocalyptic fantasizing, I think the professional, conservative, sober choice is the former.

Zooming out a bit, what matters in all future sets of economic circumstances, and with respect to particular durable good, what I prefer, generally speaking, is that I get more than what I pay in. This is a simple, one-step elaboration of the idea that I want more benefit than cost. In terms of whole life insurance, I want more cash value and death benefit than what I pay in premium.

And that’s exactly what happens.

“The problem is the problem. The premium is the solution.” — James Neathery